Why the debt-ceiling fight is low key — for now

WASHINGTON (MarketWatch) — When it comes to raising the U.S. debt ceiling, 2013 is not 2011. At least not yet.

Around this time two years ago, then-Treasury Secretary Timothy Geithner sent Congress a letter saying that the U.S. would be able to take “extraordinary measures” until Aug. 2 to keep paying the country’s bills after it reached the debt limit. President Barack Obama signed legislation lifting the borrowing limit into law on Aug. 2 — but only after a standoff that took the country to the brink of default and later led to the first downgrade of the nation’s credit.

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Treasury Secretary Jacob Lew

Fast forward two years, and the atmosphere is much calmer as Washington prepares for another of its famously muggy summers. The U.S. bumped up against its $16.4 trillion borrowing limit on May 19, but because of hefty payments to the Treasury by Fannie Mae and Freddie Mac and those extraordinary measures (things like suspending sales of state and local securities), current Treasury chief Jacob Lew says default can be avoided “until after Labor Day.”

A further reason there’s now a relative lack of heat over the debt ceiling: Others are putting the drop-dead date for raising it more than five months away. On May 23, the Bipartisan Policy Center said that what it calls the “X Date” — the day the federal government can’t pay all its bills in full and on time — will be sometime in October or the beginning of November. The Congressional Budget Office similarly says October or November.

So this summer is looking debt-crisis free, in sharp contrast to two years ago. But does that mean that there won’t be another showdown in the fall? Make no mistake, the seeds are being sown for a fight, as the Obama administration demands a no-strings-attached increase in the borrowing limit and Republicans mull their price for agreeing.

“We will not negotiate over the debt limit,” Lew wrote to congressional leaders on May 17.

Republicans have other ideas, which could make for a bitter battle in the fall. The GOP has been tossing around proposals including a tax-code overhaul, spending cuts, and even a repeal of Obama’s health-care law as conditions for raising the debt limit. House Speaker John Boehner told reporters that Republicans had “private conversations” the week of May 20, but they haven’t decided how to proceed.

The drama will also play out in the Senate this fall. Texas GOP Sen. Ted Cruz bucked his own party in a May 22 floor speech, saying he didn’t trust Republicans to block Senate Democrats from including a simple-majority increase for the borrowing limit in Senate-House budget talks. He’s demanding a 60-vote threshold, which would require five Republicans to join the Senate’s 55 Democrats.

Aware of the impact that the 2011 standoff had on the U.S. credit rating and financial markets, both sides say they want to avoid default. But for now, they’re still trying to get there by different means.

“In order to avoid a repeat of the damaging brinksmanship that occurred in 2011, Congress should remove the threat of default by [raising the debt limit] as soon as possible,” Lew wrote in his May 17 letter.

Boehner says that a House-passed bill requiring the Treasury to prioritize payments to bondholders is a “step in the right direction” for dealing with the debt limit. “Our goal here is to get America on a solid fiscal path, it’s not to default on our debt,” the Ohio Republican said before the bill passed the House earlier this month.

The White House said that Obama would veto that bill if it ever got to his desk, however.

While the two sides are preparing for another tug of war over the borrowing limit, it’s worth remembering that fiscal hawks got some good news from the Congressional Budget Office on May 15. The CBO that day slashed its estimate of the current year deficit by $200 billion to $642 billion, and said the debt-to-GDP ratio would fall to slightly below 71% in 2018 from about 76% in 2014.

By 2023, however, CBO said the debt would go back up, to 74% of GDP, and keep rising.

At least one budget expert said the report didn’t change the “still-stalemated and crisis-oriented” budget debate by “even a small amount.”

“Do the new CBO numbers mean that there won’t be a fight this fall over the debt ceiling” and another stopgap budget, asked the expert, Stan Collender, after the report came out.

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